By David Hone, CFA
A Penny For Your Regret
“I don’t care anymore if I missed it”
A new client recently said this to me as we were beginning our first investment planning meeting when we review a client’s current investment picture. I’ve heard many times from clients, prospective clients, friends and family about their regret missing the current bull market run lasting nine years. But hearing from someone that they no longer care anymore about the past and what they can’t control is the single most important step one can take when instituting a financial plan.
TV & Twitter Tune out
While it’s naturally disappointing to hear this regret it also doesn’t come as surprise especially considering the duration of the bull market (now in its 9 year). Adding fuel to this fire of regret is the incessant short term market noise from proliferating media outlets over the last decade. These told-you-so often bombastic talking heads cannot reliably predict the future or have a clue about one’s risk tolerance, investment horizon etc. They simple don’t know and are speculating instead of investing.
The Persistent & Powerfully Compounding Penny
During client meetings when the topic of investment plan stick-to-itiveness arises, I tell the story of the penny and the power of compounding. The story goes like this: Say I give you a penny at the start of the month and the value of the penny doubles every day for the next 31 days of the month. How much do you think the value of penny grows to at month’s end? $100? $10,000? $1,000,000? See the results in the graph below and table1 at the end of this blog:
As the chart shows, money does not grow in linear way, instead it grows exponentially over time. In this example the penny explodes in value to $10.7 million in just one month. This is the power of compounding at work where returns earn greater returns over time.
The Eighth Wonder Of The World
Certainly, no (legal) investment scheme exists in the world today where the value of the investment consistently doubles day-after-day. However, this exercise highlights how compounding is the most important tool for wealth creation longer term. Albert Einstein is said to have called compound interest the eighth wonder of the world. The key is controlling what one can control. By not market timing but patiently, persistently and perseveringly staying the course with low-cost investing through many economic and stock market cycles.
Control What You Can Control
Remember, the most important step is not dwelling on the past with regret. No one can accurately forecast the future and the next financial crisis, massive oil spill or emerging market currency spiral. However, you CAN control your investment product costs, portfolio diversification, set a proper asset allocation and discipline to stay the course longer term.
Life is a nonstop whack-a-mole contest with things constantly popping out of nowhere. The unexpected is usually a priority and has to be dealt with. But by starting a plan and controlling what is controllable, the barriers of inertia, lack of focus and regret should fall away. To start, several options to consider on how to take control of the financial plan wheel:
- Tune out the noise and focus on the future and facts. Forecasts are fiction and often fashionable. A complete tune out is difficult given today’s world but a long term plan will help silence the noise and provide more confidence and clarity.
- Steadily invest, via a 401(k), IRA or taxable investment account as much as possible, ideally month after month in suitable, low cost investments. An automatic investment glide path can circumvent the temptations of market timing.
- Recruit help. Consider bringing an investment professional on board to bring clarity, confidence and consistency to your plan if needed. Here’s some guidance for finding the right match for you.
Most pennies in circulation today are almost entirely made out of zinc and not copper.2 Zinc is an essential mineral for the human body as it improves immunity and boosts human growth. So when you see penny, let it be a reminder of the plan to 1) immunize from the noise and regret and 2) growth of your investments longer-term through compounding power.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner and/or an accountant for advice specific to your situation. Reproduction of this material is prohibited without written permission from David Hone, and all rights are reserved. Read the full Disclaimer.
2 If a penny is dated before 1982, it is made of 95% copper. If the date is 1983 or later, it is made of 97.5% zinc and plated with a thin copper coating.
1 The daily value of a penny
Doubling daily over 1 month